TAYLOR: Setting gas price tricky business

It is difficult enough to forecast what the Utility and Review Board will do with gas prices even when everything is going well, but a trading disruption makes predicting the price even trickier.

Ever since the review board took over setting the retail price for gasoline and diesel from a government department a couple of years ago, it has been using the same formula.

The price is normally changed every Friday, unless something happens to require more immediate attention.

For gasoline, the board takes the average New York Harbor cash price — from Thursday to Wednesday — of an American gallon of gasoline. It converts that price to litres by dividing it by 3.7854 litres, which is the number of litres in a U.S. gallon. And it converts the per-litre price to Canadian currency by dividing the price by the average Thursday-to-Wednesday value of the Canadian dollar in American funds.

To get the Nova Scotia price, one must also add the wholesale margin of six cents per litre, as set by the regulator, add the federal excise tax of 10 cents per litre and add the provincial motive fuel tax of 15.5 cents.

There is an additional board-set transportation allowance that ranges from 0.45 to 2.31 cents a litre, depending on where a station is. The board’s retail margin of 5.1 cents a litre is also added on.

Now comes the tricky part.

The regulator determines a value for “forward averaging,” which is supposed to be an indication of how the market will perform in the coming days. Finally, the formula is complete once the 15 per cent harmonized sales tax is added on — tax on tax and all.

But what happens if there is another superstorm Sandy that has the potential for disrupting commodity trading in New York for an undetermined period?

When the New York Mercantile Exchange is closed for whatever reason, the board takes the available numbers when the New York Harbor spot price was trading and calculates an average for that period, says board executive director Paul Allen.

For example, Allen says, during hurricane Sandy, the NYMEX was not operating for one day. So the Nova Scotia price was determined by taking the average of four days, instead of the normal five. It is the same practice used when there is a holiday.

“The nice thing about the Nova Scotia model … we do have the opportunity to exercise some professional judgment,” says Allen.

When the Nova Scotia gas price regulations were drawn up, the law gave the price-setting agency the right, through something nicknamed “the interrupter,” to make an adjustment at any time if there is dramatic change to market petroleum prices.

“So if we see anything happening that will threaten our gasoline supply to the pump, we can change prices off cycle,” says Allen.

If the NYMEX was down for an extended period longer than a week, there is no automatic provision for setting provincial prices, he admits.

“The board would have to sit down and see what information they did have. In other words, ‘Is everything OK at the existing price? If it is OK at the existing price, leave it alone,’

“If, on the other hand, something bad was starting to happen, like wholesalers were refusing to sell because … they weren’t getting value for money or whatever, then we would have to take a look at what information we did have and set a price.”

The board could quickly correct the price once data became available, if it was determined to be too high.

“The official answer is there is no fixed formula for doing this,” says Allen.

Nova Scotia’s gas price is affected most by the ability to trade the commodity rather than delivery of the fuel.